June 13 (Bloomberg) -- At a time of scarcity in everything
from crude oil to copper to corn, nickel is heading for the
biggest glut in four years, driving prices lower into 2012.

Next year’s surplus will rise to 60,000 metric tons from
12,000 tons in 2011, making nickel the most oversupplied metal
relative to output or use, according to Bank of America Merrill
Lynch, the most-accurate forecaster tracked by Bloomberg over
two years. New mines will boost supply 11 percent in 2012, the
most in 17 years, Macquarie Group Ltd. says. Prices may drop 10
percent to $20,000 a ton by Dec. 31, the median estimate in a
Bloomberg survey of 17 analysts and traders shows.

“I’m not particularly optimistic about nickel,” said Ian
Henderson, who manages about $10 billion of natural-resource
assets at JPMorgan Chase & Co. in London, including the Global
Natural Resources Fund, which doubled in two years. “I don’t
think there is a commercial logic for the price where it is
today. A nickel price of $15,000 is entirely possible.”

While raw-material producers are failing to extract enough
copper and oil and droughts threaten crops, nickel supply is
expanding faster than demand. Prices reached a record $51,800 in
2007 and moved at least 63 percent a year since then, leading
consumers to use more substitutes than in any other major
commodity, Macquarie says. Ikea Group, the world’s largest home-furnishings retailer, is removing the metal from kitchen and
bathroom products.

Stainless Steel

Used mostly in stainless steel, nickel fell 10 percent to
$22,283 this year by 4:46 p.m. on the London Metal Exchange,
making it the second-worst performer after raw sugar on the
Standard & Poor’s GSCI index of 24 commodities, which advanced
11 percent. The MSCI All-Country World Index of equities is up
0.3 percent and Treasuries returned 3.1 percent, a Bank of
America Merrill Lynch index shows.

Construction and transport account for 37 percent of nickel
demand, with another 18 percent used in machinery and electrical
applications, according to UBS AG. Consumption of 1.51 million
tons in 2010 was worth $33 billion at last year’s average price.

Declining prices mean profit at OAO GMK Norilsk Nickel, the
world’s biggest producer, will probably be little changed this
year, Chief Executive Officer Vladimir Strzhalkovsky said in an
interview June 8. Nickel accounted for about 43 percent of the
Moscow-based company’s 2009 sales.

“If there is a glitch in the global economy, demand for
industrial metals will go down,” he said. “It’s dangerous to
depend on nickel.”

Winning Streak

The bear market ends a two-year winning streak when prices
more than doubled. As demand rebounded from the worst global
recession since World War II, supply was curbed by strikes of a
year or more at Vale SA’s Sudbury and Voisey’s Bay mines in
Canada. The disputes have ended and the Rio De Janeiro-based
company predicts a 56 percent production gain this year.

Lower prices may force higher-cost smelters to curb or halt
output, limiting declines. China is the world’s biggest nickel
producer. The nation’s least-efficient makers of nickel pig
iron, a cheaper alternative to refined nickel, need about
$20,000 a ton to break even, according to Societe Generale SA.
Reduced demand from stainless steelmakers and rising energy
costs make it more likely that privately owned smelters will
shut in the second half of 2011, the bank said in a report.

Nickel Pig-Iron

Chinese imports of nickel ore rose 29 percent in March from
a year earlier and 33 percent in April, spurring analysts to
anticipate a similar increase in the country’s production. Those
assumptions could be wrong because the ore may be of a lower
grade, reducing the amount of metal that can be extracted and
curbing the pace of production growth, Societe Generale said in
a report June 3. Nickel pig-iron output in China may surge 50
percent this year to as much as 240,000 tons, according to
Antaike Information Development Co.

Mining costs are surging. The cost of everything from wages
to energy to changes in exchange rates rose a combined 25
percent in Canada, 18 percent in Australia and 12 percent in
Russia last year, according to UBS.

Prices were partly supported this year by a 17 percent
decline in stockpiles monitored by the LME. With Barclays
Capital predicting that the market will move into a supply
surplus in the third quarter, that trend in inventory may
reverse.

The surplus in aluminum will narrow to 301,000 tons this
year, from 609,000 tons in 2010, Bank of America Merrill Lynch
estimates. Prices for the metal used in aircraft and cars rose 6
percent this year on the LME. The glut in zinc will drop to
11,000 tons from 675,000 tons, the bank forecasts. Zinc
retreated 8.1 percent in London since the start of January.

Oil Market

Production of copper will fall 380,000 tons short of demand
in 2011, compared with a 108,000-ton deficit in 2010, Bank of
America Merrill Lynch says. Prices declined 6.9 percent this
year. Lead, which declined 0.2 percent since Dec. 31, is moving
into a shortfall of 61,000 tons from a surplus of 35,000 tons,
the bank predicts. Supply of tin, which fell 5.8 percent this
year, will be 12,000 tons less than demand, the same amount as
in 2012, Barclays Capital estimates.

The oil market is using inventory and the spare production
capacity of the Organization of Petroleum Exporting Countries to
meet consumption, Goldman Sachs Group Inc. said in a report May
23. Both will eventually become exhausted, requiring higher
prices to restrain demand, the bank said. New York-traded crude
oil rose 8.7 percent this year.

Economic Growth

Nickel supplies are increasing at a time when economic
growth is showing signs of weakening. U.S. Federal Reserve
Chairman Ben S. Bernanke said June 7 the recovery remains
“uneven” and “frustratingly slow,” three days after the
Labor Department reported that employers added the fewest jobs
in eight months.

German industrial production fell for the first time in
four months in April, the Economy Ministry said June 8. A day
earlier, the World Bank cut its 2011 global growth estimate to
3.2 percent from 3.3 percent.

While stainless-steel output rose 8.6 percent to 8.39
million tons in the first quarter, a record for the period, the
International Stainless Steel Forum said last month that gains
won’t be sustained through the year. The Brussels-based group’s
members account for about 75 percent of global output. Rising
production may also mask a swing toward demand for steels
containing less nickel or substitution with other materials.

Kitchen Products

Ikea, based in Stockholm, plans to almost eliminate nickel
from its bathroom and kitchen products by August 2012, said
Gaetano Ronchi, a senior manager at the company’s purchasing
arm. Of the 80,000 tons of stainless steel it uses annually, 88
percent is now nickel-free, he said.

With nickel accounting for at least half the cost of 300-series stainless steel, the most common type, the retailer is
not alone in seeking alternatives. The steel’s market share fell
to 56 percent last year from 72 percent in 2000, Macquarie
estimates.

Nickel demand now is about 20 percent lower than it would
have been if prices hadn’t jumped more than fourfold to the 2007
record in the space of 18 months, according to Jim Lennon, the
head of commodities research at Macquarie in London who has been
following the market for three decades.

The switch from nickel-bearing stainless steels means less
potential to absorb additional supply. Vale will start the
furnace at its Copper Cliff plant in Sudbury in June after four
months of repairs. Xstrata Plc, based in Zug, Switzerland,
reopened its Falcondo plant in the Dominican Republic in the
first quarter, having shut it in 2008.

Iron Ore

Norilsk resumed production at its Lake Johnston mine in
Australia last week, after halting operations in 2009 because of
costs. While the company forecasts a 5.9 percent increase in
output this year, it wants to decrease its reliance on nickel in
favor of copper, iron ore and coal.

Pacific Metals Co., based in Tokyo, Japan’s largest
ferronickel producer, plans to open its Hachinohe plant in June
after repairing damage caused by the country’s earthquake in
March. Ferronickel contains about 38 percent nickel and is used
by stainless-steel makers as a cheaper alternative to refined
metal. New supply is also coming from projects in Brazil owned
by Vale and London-based Anglo American Plc.

“Nickel probably has the most bearish outlook of all the
metals,” said Michael Widmer, an analyst at Bank of America
Merrill Lynch in London. “The thing that saved the market in
the last two years was the strike at Vale. Someone will have to
cut output, or delay projects.”